Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

Bringing Down Costs through Privatization

The most promising way to control taxpayers' costs includes privatizing prison construction and operation. Short of full privatization, government-operated correctional facilities could be corporatized and operated like private businesses.

Economic theory implies that if there were better markets to buy, sell and rent prison cells, the problems of funding and efficiently allocating prison space would decrease. And there are numerous - unexploited - opportunities to reduce the net costs of prisons by creating factories behind bars, having prisoners earn their keep and compensate victims.

"A number of studies have found savings of 20 percent for private construction of prisons and 5-15 percent for private management."

Privatizing Prisons. A number of studies have found savings of 20 percent for private construction costs and 5-15 percent for private management of prison units.30 Further, independent observers who monitor, for example, the contracts of Corrections Corporation of America (CCA), a Nashville, Tenn., company, praise the quality of the company's operation.31 George Zoley of Wackenhut Corp. in Coral Gables, Fla., years ago predicted a gradual building process in which the private sector establishes a "good track record and proves it can do the job."32 Within a decade, it has come to pass:

With 70,937 adult prisoners in secure private correctional facilities at year-end 1997, the market share of private prisons has risen to 4 percent of the U.S. prison and jail population.33

Between 1996 and 1997, private facilities under contract in the United States also rose from 118 to 142, a one-year increase of 20 percent.

Over 7,000 federal prisoners were housed in private correctional facilities at the end of 1997.

Texas leads the nation in privatization, with 41 private adult correctional units in operation or under construction.

Major companies in the industry include CCA, with a rated capacity of 50,866 in facilities under construction and planned expansions in the United States, Wackenhut Corrections with 22,257 and U.S. Corrections Corporation with 5,259. Profits, however, remain modest.34 For example, CCA and Wackenhut report small profits, but Pricor, Inc., of Murfreesboro, Tenn., an early leader in the industry, quit adult corrections after suffering a series of losses. Last year, the stock prices of publicly traded companies like CCA and Wackenhut Corrections traded at historic highs and other corrections companies were able to successfully sell initial and secondary stock offerings.35 More recently, CCA sold at 23 times 1998 estimated earnings and Wackenhut at 27, more moderate multiples, suggesting less investor optimism about future earnings, despite rapidly improving earnings.

There is no insurmountable legal obstacle to total privatization of prison operation.36 Unlike government agencies, private firms must know and account for all their costs, including long-run costs.37 Governments conceal costs and markets reveal them (as well as reduce them). If private enterprises can operate prisons for less than the government with equal or better quality services - and all indications are that they can - then government should set punishments for felons and let the private sector supply prisons.

CCA charges Harris County, Texas, and the Immigration and Naturalization Service only $35.25 per inmate per day to operate a 350-bed minimum-security facility in Houston, a charge that includes recovery of the cost of building the facility.38

Operating costs for government-run prisons can be twice that amount, even without taking construction and land costs into account.39

"Given the grim predictions of opponents, very little has gone wrong with privatization."

What Can Go Wrong with Privatized Prisons. Privatization of jails and prisons has been perhaps the most controversial topic in corrections during this century.40 Given all that could have gone wrong during the 15-year experience with private prisons on three continents, and the grim predictions of its opponents, very little has gone wrong. No serious corruption of public officials by private prison operators has been exposed. No extraordinary number of inmates have escaped from private facilities. Reports of prisoner abuse or violence have been extremely rare. In fact, no systematic evidence has shown that private operators are not doing the job better and cheaper. Academic studies show superior performance by the private sector, including lower recidivism among inmates released from private facilities.41

The only negative report by a noteworthy independent source was from the U.S. General Accounting Office, which reported "little difference and/or mixed results in comparing private and public facilities" and "could not conclude whether privatization saved money."42 The GAO report was widely publicized by opponents of privatization. Unfortunately, the authors ignored most of the evidence, including carefully prepared reports from Australia, Florida, Louisiana, Texas and the United Kingdom. The authors knew that statutes in most jurisdictions define contracting with private operators as unlawful unless the jurisdiction can demonstrate cost savings, but chose to ignore this fact. The report also trivializes the accreditation process of the American Correctional Association, a demanding test at which private facilities excel. In a detailed refutation, Professor Charles Thomas of the University of Florida terms this last error "sophomoric," while describing the overall report as "inaccurate," "misleading" and "ineptly prepared."43

A third option, yet untested, is to contract out adult facilities to nonprofit groups, including faith-based prison operators. As Professor Richard Moran of Holyoke College puts it, "A private, not-for-profit foundation is in the best position to organize a prison around a set of principles intended to reshape criminals into honest, productive citizens."44 No public officials have yet had to courage or sense to try such a jail supplier, despite the successes nonprofit and faith-based hospitals, schools and juvenile programs have had.

Employing Prisoners. America's prisons originally were intended to be self-supporting, and during the 19th century many state prisons ran surpluses and returned excess funds to their governments. In 1885 three-fourths of prison inmates were involved in productive labor, the majority working in contract and leasing systems. Fifty years later only 44 percent worked, and almost 90 percent of them worked in state rather than private programs.45 Today, prison inmates are a huge drain on taxpayers, despite the millions of available hours of healthy, prime-age labor they represent.

"Federal and state laws, as well as bureaucratic obstacles, impede more labor by prisoners."

Increasing productive work for prisoners can be facilitated by repeal or liberalization of some federal and state statutes and clearing away bureaucratic obstacles. The federal Hawes-Cooper Act of 1929 authorized states to prohibit the entry of prison-made goods produced in other states. The Walsh-Healy Act of 1936 prohibited convict labor on government contracts exceeding $10,000. The Sumners-Ashurst Act of 1940 made it a federal offense to transport prison-made goods across state borders, regardless of state laws.46

Throughout the nation, a score of exceptions to the federal restrictions on prison labor have been authorized, provided the inmates are paid a prevailing wage, labor union officials are consulted, other workers are not adversely affected and the jobs are in an industry without local unemployment.47

A survey commissioned by the National Institute of Justice identified more than 70 companies that employ inmates in 16 states in manufacturing, service and light assembly operations.48 Prisoners sew leisure wear, make water-bed mattresses and assemble electronic components. PRIDE, a state-sponsored private corporation that runs Florida's 46 prison industries - from furniture making to optical glass grinding - made a $4 million profit in 1987.49

Such work enables prisoners to earn wages and acquire marketable skills while learning individual responsibility and the value of productive labor. It also ensures that they are able to contribute to victim compensation and to their own and their families' support while they are in prison. A 1991 study by the U.S. Bureau of Prisons found that only 6.6 percent of federal inmates who had been employed in prison industries violated their parole or were rearrested within a year of their release vs. 20 percent for nonemployed prisoners.50

In 1990 7.6 percent of all state and federal inmates had jobs in correctional industries; by 1996 this had dropped to 6.6 percent (under 80,000 inmates) because traditional correctional industries, mostly socialist-run, were not expanding fast enough to keep pace with inmate population.51 Gross sales were $1.6 billion, overwhelmingly to other government agencies, and wages paid to inmates were $74 million, or less than 5 percent of gross sales.52

In 1997 the Private Sector Prison Industry Enhancement program had nearly 100 private firms employing 2,400 inmates to manufacture goods ranging from circuit boards to bird feeders to graduation gowns.53 Airline reservations, telemarketing, data processing and map digitizing services employed others. At the current annual rate, $13 million in gross wages is being paid (approximately $6,600 per prison-employee year), for a cumulative total of $50 million since 1979. Prisoners have retained 56 percent of their wages and paid out the rest in room and board (19 percent), taxes (12 percent), victim restitution (6.6 percent) and family support (6.4 percent).

"Only about 5,000 prisoners (less than 1 percent) work for private companies."

South Carolina and Nevada have become leaders in private sector use of prison labor, yet nationally only about 5,000 prisoners (far less than 1 percent) work for private companies because of the additional costs of doing business in prisons.54

Fred Braun Jr., president of Workman Fund in Leavenworth, Kan., has been a key promoter of Private Sector Prison Industries (PSPI). Organized as a nonprofit foundation, Workman lends venture capital to private enterprises interested in training and employing prisoners on-site in "real world" work. Workman reported promising results from an enterprise in which convicts worked alongside nonconvict labor. Braun also is president of Creative Enterprises, the umbrella company for two plants, Zephyr Products, Inc. (sheet metal products) and Heatron, Inc. (electric heating elements), which train and employ minimum-custody inmates at the Lansing East Unit in Leavenworth.55 Braun's original vision was of an industrial park of three or four firms employing 200. Thirteen years after opening Zephyr, he had added no more businesses, but his two original plants were employing about 150 prisoners.56

Bureaucratic inertia slows the transition to private work for prisoners. For example, the state corrections system in Texas has long been a leader in state-run prison industries, which probably has hindered the introduction of private sector opportunities for prison employment and production there.

Among the steps that should be taken to make prisons hum with productive activity are:

Repeal or liberalize the various state and federal laws that restrict trade in prison-made goods.

Repeal the laws that compel government agencies to buy prison-made goods and allow competitive bidding by the agencies.

Allow private prison operators to profit from the gainful employment of convict labor.

Such reforms would overwhelmingly benefit American taxpayers, consumers, workers and businesses.57 Congressmen Bill McCollum (R-Fla.), chairman of the U.S. House Judiciary's subcommittee on crime, and Pete Hoekstra (R-Mich.), have recently introduced new legislation to reform federal prison industries.